Russian Insurer INGOSSTRAKH upgraded to 'BBB-' from 'BB+' on Stronger Quality of Investment Portfolio with a stable outlook

On October 24, S&P Global Ratings raised its issuer credit and financial strength ratings for the Russia-based INGOSSTRAKH Insurance Co. to 'BBB-' from 'BB+.' The outlook is stable.

S&P's press release explains:

The upgrade reflects our view of the improved credit quality of Ingosstrakh's investment portfolio. We assess that the average credit quality of its fixed income instruments, including bonds and bank deposits, has improved to the 'BBB' category from 'BB'. The improvement has been driven by our upgrade of Russia (foreign currency BBB-/Stable/A-3; local currency BBB/Stable/A-2) and the insurer's more conservative investment policies. Ingosstrakh is gradually de-risking its investments, in particular those of its subsidiary, Bank Soyuz. The latter, which required significant capital injections in 2015 and 2016, has improved its capital position with a risk-adjusted capital ratio above 7%, thanks to capital support from Ingosstrakh and moderate loan growth.

At the same time, greater retained earnings resulting from strong net profits and a zero dividend policy have strengthened capital buffers both under our capital model and regulatory requirements. We expect this trend to continue, and in particular we expect Ingosstrakh to continue to consolidate its capital at the 'AAA' confidence level according to our capital model.

These improvements have led us to reassess Ingosstrakh's financial risk profile to moderately strong from less than adequate, which is a driver of the upgrade. We apply a negative holistic adjustment of one notch to derive the 'bbb-' stand-alone credit profile, reflecting that the average credit quality is still in the low 'BBB' range. Also there is still a limited track record of investment de-risking and capital adequacy consolidation. In particular, Ingosstrakh remains exposed to sovereign risk and the regulatory environment in Russia, in light of its business and asset concentration in its home country. While the operating and economic environment is improving, it remains challenging, in our opinion.

In our base-case scenario for the coming two years, we assume Ingosstrakh will demonstrate sound underwriting performance, with a combined ratio of around 95%-97%, which is better than our estimates of the sector average of close to 100%. The returns on revenue and equity are likely to be at least 9% and 10%, respectively, reflecting our expectation of an annual net profit of around RUB7 billion in 2018-2020.

The stable outlook reflects our expectation that our rating of Ingosstrakh will remain unchanged over the next two years. We expect the insurer will further pursue its conservative investment policy and maintain sound underwriting performance in 2018-2020, underpinning its capital adequacy and strong competitive position.

We would upgrade the ratings in case of:

• Further improvements in the economic, credit, and operating environment for insurers in Russia; or

• A longer track record of continuous improvements in the investment portfolio's credit quality, combined with capital adequacy comfortably exceeding 'AAA' confidence levels, an average property/casualty combined ratio below 98%, and no significant unexpected support provided to Bank Soyuz.

We could lower the ratings if we were to observe a deterioration of the average credit quality back to levels below 'BBB'. In particular, a negative rating action on Russia would likely drive the average credit quality of Ingosstrakh's investment portfolio back to 'BB' or lower, unless the insurer significantly increased diversification outside Russia.

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